Thursday, February 26, 2015

I found this Upshot article in the New York Times about emerging
trends between cities and suburbs fascinating for a variety of reasons. According
to the article, employment outside of city centers rapidly outpaced central
cities up until 2007. However, the scale has tipped slightly in the other
direction with inner city employment rising more rapidly than suburban employment
growth. Notably, new urban jobs are more highly skilled and high-paying while working
class jobs “are more likely to be suburban” Increased urban growth presents new opportunities for
efficient urban, walkable, and transit-oriented communities. However, these hot
real estate markets increase land prices making development more expensive.
Those costs get passed on to the buyers, and the risk is that cities will
become havens for the wealthy and inaccessible to the middle and working class.
New York and DC seem to exemplify this exclusivity, where cost of living
squeezes out the middle class. The potential for compounded socioeconomic stratification
– wealthy, educated households in exclusive urban districts– is a concern. However,
the benefits of strong cities outweigh the disadvantages. As the article states,
a weak or economically frustrated urban core can burden the whole metropolitan area.
Further, the dense cluster of employment can facilitate efficient travel and
transportation systems as opposed to more polynucleated urban areas that tend
to be more auto-friendly and environmentally damaging. No doubt these shifts will affect state and local budget
as constituencies - service needs - evolve.

Tuesday, February 24, 2015

Property Tax and
Non-Profits

Non-profit organizations are often exempt from paying
property taxes on real estate or buildings they own. Among these exempt organizations are
not-for-profit hospitals and colleges.
The National Bureau of Economic Research estimated that the aggregate value
of property tax exemptions for not-for-profit hospitals alone totaled $1.7
billion in 1994[i]. Some hospitals have since expanded into
outlying, suburban communities where the cost of acquiring real estate is low,
putting further pressure on municipalities to fund police, fire and other
required services[ii].

In exchange for exemption from property taxes, many
not-for-profit hospitals contribute funds to what’s known as the PILOT program,
or “payments in lieu of taxes.”
Non-profits make voluntary payments to the program, which is then
distributed back to municipalities to help pay for public services like police
and fire. However, the PILOT program has
been criticized for a lack of transparency and an “ad hoc” process for
calculating the amount of the payment that results in underpayments and huge
variability among similar non-profits[iii]. Ultimately, the PILOT program was found to
have “negligible revenue potential” despite tax-exempt properties ranging from
12 percent of the property tax base to as high as 60 percent of the total
property tax base (if state government properties are included).

The overarching reason for property tax exemption for
non-profit organizations is commonly believed to be because non-profits are “contributing to the general welfare and [are] providing social goods.[iv]” A 2010 court case called into question
whether property tax should be exempt for good intentions. The Illinois Supreme Court upheld the denial
of property tax exemption to Provena Hospitals upon finding that the total “charity
care” provided by the hospital amounted to only 0.723 percent of its revenue in
a given year[v]. The court found that the vast majority of the
facility’s funds came through private insurance, Medicare and Medicaid, or as direct
payment from the patient, a funding structure not easily distinguishable from
for-profit hospitals.

Thomas J. May, the tax assessor for Hennepin County in 2008,commented on an earlier Minnesota court case that found that a daycare facility
was no longer tax-exempt because they “weren’t giving enough away.” May noted difficulties in distinguishing
non-profits from for-profits from an assessor’s view largely because “there are
so many different types [of non-profits], and many of them are doing the same
thing for-profit groups that aren’t exempt are doing.[vi]” In order for the daycare facility to be
considered a non-profit or a “purely public charity,” the court ruled that it
would need to charge “charity” customers less and that its rates would need to
be lower than its competitors.

Tuesday, February 17, 2015

Business Climate
Warming up in Michigan

Historical context:

During the Great Recession, Michigan experienced levels of
unemployment much higher than any other state in the union, as well as beating
the national average.The nation watched
as federal stimulus dollars went to bailing out the Motor City’s biggest
employers: Ford, GM, and Chrysler. Michigan and some of its most prominent
cities are still fighting back from the downward spiral that occurred in 2009.
Although the current unemployment rate is about half of 2009 highs, Michigan
still has a higher rate of unemployment than the national average.

Laying the framework:

Governor Rick Snyder, well known for using his private
sector experience to inform policy solutions, believes one way to catalyze the
return to prosperity for the state is to create a more welcoming economic
climate for businesses. Snyder says, “The role of the government is not to create jobs, it’s to create an
environment for success.” Snyder signed into law substantial adjustments to the
Michigan Business Tax in 2012.

The Harbinger: The Michigan Business Tax was a morass of multiple kinds of
taxes on business property, operations, and transactions and a myriad of tax
credits and incentives. In 2012 efforts were made to simplify the structure and
decrease the amount of taxes businesses would have to pay. Those in favor of
the changes to the Business Tax believe it was the right mechanism to enhance
the state’s business climate, making Michigan a more attractive locale for
businesses to establish themselves and hire Michigan residents as employees.
Opponents claim the burden has merely shifted to individuals with high risk of
little fruitfulness. Michigan is now taxing retirement income and decreasing the
earned income credit. Those most affected by these changes are the low and
middle classes.

Business
taxes were decreased by 24 mills for industrial personal property and combined
with a 35% tax credit; overall, Michigan businesses would have to pay 65% less
in personal property taxes. Commercial personal property tax rates were also
decreased by 12 mills or 23%.

Present Day Implications:

Prop 1 was
a law that was approved by Michigan voters in fall of 2014 that will phase out
personal property taxes businesses pay for office and industrial equipment. The
phase out will mature over a decade and will benefit small and big business
alike. Manufacturing companies, like the Big Three in Detroit, donated $8
million to support the proposal. The proposed plan aims to encourage growth and
investment in the private sector by saving businesses money over time.
Regionally, Michigan was the odd man out because it still enforced the personal
property tax. The phase out is estimated to cost Michigan up to $600 million a
year but businesses will still have to pay about $100 million per annum and the
remaining gap will be repaid to the state through funds businesses have to pay
as previous tax credits expire.

Local
governments will instead receive funds from the state use tax, another type of
property tax, to provide local services.

For the past month, Governor Mark Dayton has been highlighting his plan to add
$6 billion dollars for transportation funding over the next 10 years by
proposing a 6.5% wholesale gas tax. The gas tax would have floor of $2.50 per
gallon, which equates to about 16 cents per gallon of additional tax. There
would be no ceiling, so as the price per gallon increased so would the tax.

Dayton recently outlined 600 road and bridge projects that
his transportation bill would fund, in which 72% of the projects are in Greater
Minnesota while 28% are in the metro. These include 2,200 miles of state road
and 330 bridges.

Currently the Minnesota stands at 28.5 cents. The gas tax
remained stagnant at 20 cents per gallon from 1988 to 2008. In 2008, Minnesota started
phasing in a 5 cents increase in the gas tax along 3.5 cent debt service
charge. The 8.5 cent total rise was phased in over a four year period starting
July 1st, 2008 until July 1st, 2012.

Gas taxes are mostly viewed as an equitable way to fund
transportation since the people that use the roads the most would be paying the
most. Additional gas taxes are also easily implemented since they
already exist, so it administratively feasible. However, politically it will be
a tough sell since this will noticeable tax, especially with the heavy media
coverage. Also, Republicans control the House which adds to the difficulty of
pass this transportation budget.

A drawback, however, would be that lower-income people who drive a long way to work
(specifically rural areas in Greater Minnesota) would be paying a disproportionate
amount of their income to the gas tax. Also, policy makers need to take into
account the rise in more fuel efficient and electric cars. These cars will be
using the roads and bridges but paying relatively little in the ways of a gas
tax.

On a related note, Humphrey Professor, Jay Kiedrowski wrote
an op-ed for MinnPost on Feb 9th, 2015 where he agreed that it was
time for Minnesota to raise their gas tax in order to repair roads and bridges
and relieve congestion in the metro.

Wednesday, February 11, 2015

Many
argue that America’s tax revolt began with the election of Ronald Reagan in
1980, but the movement really began in California in 1978 with the passage of Proposition 13. The measure affected virtually every activity in the state,
but decades later, it would fuel the demise of California's redevelopment agencies.

Redevelopment
agencies in California had used tax-increment financing (TIF) as a tool since
the 1950s. In the late 1970s, however, the tax landscape changed in two ways:
federal funding for urban revitalization dried up and the voters passed Howard
Jarvis’ Proposition 13 (or, the People’s Initiative to Limit Property Taxation),
reluctantly accepted by Governor Jerry Brown.

Prop 13
proved to be a monumental shift in local government revenues and expenditures. The measure rolled property tax assessment
values back to 1976 levels, and capped the possible valuation growth at 2%.
Moreover, the practice óf annually reassessing property was scrapped in favor
of a system in which property was only reassessed on sale, where property taxes
would begin at 1% of value and remain subject to the 2% valuation increase cap.

The
measure sent shockwaves through local governments. Schools, which had been
primarily funded by local property tax (and had been among the best in the
nation) saw precipitous decline in spending per pupil. After Serrano v. Priest,
the state was required to backfill all school funding that could not be met by
local property tax.

In the
world of redevelopment, local governments were forced to switch tactics.
Suddenly, encouraging or subsidizing housing projects became cost inefficient. The use of TIF skyrocketed as cities engaged in bidding wars in pursuit of retail development and their
now-juicy sales tax dollars. As tax revenue became scarcer, competition
between state and local governments increased.

In the
coming decades, cities turned to TIF to keep local tax dollars out of state
hands. Redevelopment agencies drew more and more ambitious borders for their
TIF districts and extended the lives of the districts about to expire – at one
point, the entirety of downtown Los Angeles was placed in one of nine TIF districts. With all new property tax dollars going into the coffers of
redevelopment agencies, even less local money was left to fund schools which
left an even larger burden to fall on the state.

This
shell game came to an end in 2011. In the midst of a budget crunch, lawmakers
in Sacramento looked jealously at the massive war chests that redevelopment
agencies had accrued. 33 years after Jerry Brown had watched voters pass Prop
13, he found himself in the governor’s office under pressure to right the
sinking ship that was the California budget. He dissolved local redevelopment agencies
and ordered their funds to be divided among a variety of successor agencies.
TIF died along with them.

In
September 2014, however, Governor Brown resuscitated TIF in the form of
Enhanced Infrastructure Financing Districts, which are limited to explicitly
public projects, infrastructure, and low-income housing rather than job or
retail. Given that Proposition 13 is untouchable in California, creative financing
tools like TIF – although they can be abused – are necessary to facilitate
redevelopment throughout the state.

Tuesday, February 10, 2015

According to the New
York Times, Illinois has the “country’s worst-funded public pension system,
… billions in unpaid bills and the worst credit rating.” The financial woes of
the state have been called “staggering”
and Moody’s ranks the state as the most troubled in the country. The new Republican governor, Bruce Rauner,
faces a Democratic senate but many hope both sides will compromise in the face
of such gloomy financial straits. Rauner will soon unveil his proposed annual
budget, which is expected to address the current pension crisis.

Before the formal budget proposal, Rauner’s first
step has been to bar unions from requiring all workers to pay dues, a
relatively aggressive move targeted at the public sector.This new prohibition would affect about 6,500
workers who are not in unions but pay fees to them and benefit from the
collective bargaining agreements they produce. He believes this will undo a
“corrupt bargain” that is costing Illinois taxpayers and has reasoned that the
existing setup is unconstitutional.

Teacher pension reform is a large discussion topic (at least
in some circles). The Illinois Policy institute thinks
that the state has no business paying teacher pensions, and this should be a
local action. However, this calls into question the various levels of wealth at
the local level – would wealthy localities have an easier time paying their
teachers? Some argue that the “body of government that approved [pension] costs
– the school districts – should be held accountable” and not the state
(devolution principle).

With a state unable to pay for its programs, it could cut
spending (services) or raise taxes. Some argue that tax hikes will cause
business or residents to flee (“voting with their feet”), reducing revenues
further. This could perhaps incite a downward spiral for the state (leading to
a decrease in the state’s credit ratings, increasing the difficulty of
obtaining financing to pay its outstanding debts, and so on).

As an alternative to traditional pensions, Federal employees
switched to a 401-K type model in the 1980s. Some have
proposed Illinois switch to this model to deal with the pension costs. However, changing the status quo will
be politically difficult as entitlements have become naturalized (ie. taken for
granted). Budget hearings with the public will be held through May. Many strong
opinions can be expected, but what viable strategies will actually be proposed to balance Illinois' budget?

Interesting link that calls itself an “interactive almanac
of U.S. politics":

Monday, February 9, 2015

Recently, the Metro in Washington D.C. has some trouble. Their ridership is declining, which is partially caused by the cut in federal transit benefit from $250 per month to $130 in 2014. The loss of customers in Metro leads to the decline of fare revenue. The committees of Metro in D.C. plan to cut the metro service and raise the transit fare to balance their budget. On the other hand, the maximum monthly pre-tax deduction for parking in D.C. area is increased to $250 in 2014. Public investment into roads/bridges is more popular than that of public transit/metro.

Thinking the nature of service, externalities, and social equity, public investment into metro/public transit should be paid more attention to roads/bridges. The service of metro/public transit is closer to public goods (assuming that the gov’t can provide as many buses/subway lines as possible), while the use of roads/bridges is more like common-pool goods (assuming that no toll fee is implemented). According to the nature of these two services, metro/public transits should be provided by government and the use of roads/bridge should be regulated.

Furthermore, the externalities of these two services are very different. The increased use of public transit/metro has positive externalities; while the increased use of cars has negative externalities. It is found that increased use of public transit can decrease the emissions of air pollutants and greenhouse gases; while the use of automobiles is one cause of urban air pollution. If the social equity concern is considered, the public transit can benefit more to low-income people.

From the perspective of government, fiscal return of public investment might be more important. To finance metropolitan infrastructure is a big challenge for local governments now. Both roads/bridges and public transit/metro needs money to maintain and upgrade the system. However, the investment into roads/bridges can encourage the automobile use, which creates more fuel tax revenue. The earmarked fuel taxes are the main revenue source to maintain the transportation system. In comparison, the public transit/metro needs more money from government to support their service. The fiscal return of roads/bridges is bigger than that of public transit/metro.

Linking back to the theory of fiscal federalism, local service is better provided by local government, given the complete information and representative issues. However, in the case of Metro in D.C., it is unknown that the policy made is reflected by the residents or it is from middle-higher class group.

Explanation:

The transit benefit: “The IRS allows private-sector workers to take up to $130 monthly out of their wages, before taxes, to cover public-transit fares. Federal employees who use public transportation can get a subsidy of up to $130 monthly without a pay deduction.”--From Washington Post Feb 7, 2015

Tuesday, February 3, 2015

In order to understand the potential ups and
downs of a budget process and the serious implications it can have on city
operations, I direct your attention to the fiscal crisis that plagued the City
of Scranton, Pennsylvania in 2012 – the repercussions of which are still being felt today.

Scranton, which has been losing population since
the mid-twentieth century when two of its main industries - anthracite coal
mining and garment making - also severely declined, has experienced its share
of financial troubles. However, in the summer of 2012, the City’s financial
problems escalated to unprecedented levels: it did not have enough money to make payroll for its 400 employees. Mayor Chris Doherty slashed all city employees’ salaries,
including his own, to the state minimum wage of $7.25 per hour, in an effort to
try to close the budget gap.

In 2012, the City had more than $300 million in
debt and a budget deficit of $16 million for that year alone. To offset the
City’s cash flow crisis, the Mayor proposed raising taxes; the City Council,
however, opposed such a proposal, instead offering the suggestion of borrowing
money to cover the gap and failing to enact the Mayor’s proposed budget. Both
proposals have their issues, as increasing property taxes may both burden
existing residents and dissuade potential residents from relocating to the
city, further exacerbating the dwindling tax base. Borrowing money, however, only
kicks the can down the road - and may prove an increasingly difficult task, as
lenders are hesitant to become involved with the City.

So, I ask: What can a city in Scranton's position do to significantly improve its financial health?

Whatever the solution may be, it must not simply
be short-term. Rather, it must comprehensively address the “underlying issues, including
grossly underfunded pension systems, unsustainable debt and excessive
collective bargaining contracts” that have significantly hampered budget
development. PA Independent

Here’s a short video clip from MSNBC explaining the situation. And here are some additional news
articles: